The Welfare Reform and Work Act 2016 requires registered providers of social housing in England to reduce social housing rents by 1% a year for 4 years from a frozen 2015 to 2016 baseline and to comply with maximum rent requirements for new tenancies.

Regulations under the Act set out exceptions from rent reduction, additional criteria for granting exemptions and impose alternative requirements on certain categories of housing excepted from the basic provisions.

How the reduction applies

The policy applies from 1 April 2016. In each of 4 ‘relevant years’ registered providers of social housing must reduce the total rent payable by a tenant in year by 1% (though the Act is not prescriptive regarding how this 1% rent reduction is implemented, it could be by a 1% reduction from the beginning of a year, or a larger reduction later in the year). If a tenancy starts or ends during the year, the reduction would be on a pro-rata basis.

For social rent properties, the reduction applies to the rent element and not to service charges. For most Affordable Rent properties, the reduction applies to the total amount, inclusive of service charges. Where the social rent is used as a rent ‘floor’ for an Affordable Rent property, the reduction applies to the rent element only.

Relevant year

For local authorities and most private registered providers, the start of relevant year will be 1 April. However, in the case of a private registered provider where the majority of tenants’ rent reviews are on another date, the relevant year could start on that date. The landlord may however choose to use 1 April if it prefers. If the private registered provider does not have a standard practice or did not exist before 1 April 2016, the relevant year will start on 1 April.

To calculate the baseline rent, the landlord should take the rate of rent that applied to a tenant on 8 July 2015 and work out the rent that would have been payable if that rate had applied over a 12 month period. The amount payable in the first relevant year is this amount less 1%. In each of the subsequent 3 years, the maximum rent is found by reducing the amount payable in the previous year by 1%.

Where a tenant’s rent review date does not align with the start of a relevant year, the Act overrides the rent review dates in a tenancy agreement to enable the provider to reduce the rent from the start of the relevant year.

Where the social housing stock is transferred from one provider to another, the former provider’s relevant year will continue to apply to the transferred stock.

Permitted review date

If the Secretary of State consents a provider may use the rent on a different day to determine the baseline rent (“permitted review day”).

The Secretary of State has issued a general consent which enables providers who had not implemented their 2015 to 2016 rent increase on 8 July 2015 to use a permitted review day - generally 31 March 2016 except in the case of re-lets of Affordable Rent housing where the permitted review day is the day the new tenancy agreement starts. This is to ensure that all landlords have a 2015 to 2016 baseline for the reductions.

The baseline rent and rents in the 4 relevant years is calculated in the same way as the above, save that it is the rate of rent on the permitted review day (not 8 July 2015) which forms the basis of the calculation.

Rents for new tenancies starting after the beginning of 8 July

Schedule 2 to the Act sets out how rents in the first relevant year should be set for new tenants whose tenancies start after the beginning of 8 July. These requirements apply to tenancies of new homes and re-lets to a new tenant (but not the grant of a new tenancy to an existing tenant).

Existing social rent properties

When there is a new tenant of existing social rent properties with a tenancy starting after the beginning of 8 July, the maximum rent in the first relevant year is whichever is the higher of:

‘assumed rent rate’, which is based on the rate that the previous tenant was paying on 8 July (or on an alternative permitted review date) or the rate that a previous tenant might have paid on those dates if the property was vacant at the time; a 1% reduction is then applied in each relevant year; or

‘social rent rate’, which is calculated by using the formula rent for 2015 to 2016 and applying a 1% reduction in each relevant year

We are aware that there may be existing properties whose rents are already above the formula rent levels. The ‘assumed rent rate’ can be used in these cases and is intended to ensure that providers would not have to reduce rent for a particular property by more than 1% in the first year.

We are also aware that some providers may still have properties whose rents are below formula rents. In these cases, providers will – should they wish - be able to bring the rents up to the ‘social rent rate’ on re-let to a new tenant, similar to re-lets at formula rent under the existing rent policy.

New social rent properties

The maximum rent for new social rent properties is the ‘social rent rate’ as set out above.

Affordable Rent properties

The maximum rent for an Affordable Rent property, when it is first let to a new tenant, is 80% of the market rate, inclusive of service charges, or the ‘social rent rate’ (exclusive of service charges), whichever is higher. Providers should then apply the 1% reduction in the following relevant years. The market rent should be based on the valuation methods recognised by the Royal Institution of Chartered Surveyors.

Exceptions from social rent reductions

Full exceptions

low cost home ownership or shared ownership homes

where the property is subject to a mortgage or other security arrangement, and the mortgagee or other security holder is in possession of the property; a receiver is appointed to receive the rents and profits of that property; or where a person is appointed to administer or sell the property for the purpose of enforcing security; in the unlikely event that a property has to be sold to enforce a mortgage or other security arrangement, it would no longer be subject to the reduction; this is intended to protect the loan security valuation

properties let on Intermediate rent terms, this will include those provided under government programmes and those provided without public capital subsidy

specialised supported housing fitting certain criteria – supported housing developed in partnership with councils, local health or social services offering a high level of support for clients, for whom the only alternative options are care homes

All PFI-funded housing, both HRA and non-HRA

temporary social housing and short-life leasing schemes for the homeless

residential care homes or nursing homes

student accommodation

legacy social housing under the Housing Act 1996 that is not low cost rental accommodation as defined by section 69 of the Housing and Regeneration Act 2008.

Exceptions with alternative provision

properties let to high income social tenants – as currently defined under the Rent Standard 2015, and the guidance on rents for social housing from April 2015; provisions relating to high income social tenants will be amended when Regulations under the Housing and Planning Bill come into effect; exceptions also apply to properties previously let to high income social tenants

Certain Rent Act 1977 tenancies – a landlord does not have to reduce rents if the ‘fair rent’ set by the rent officer is lower than the social rent rate; if that changes the maximum rent would then be the social rent rate

an exception applies if in the previous year the tenant’s rent was temporarily reduced or waived; that period should be disregarded when calculating the rent due

a provider may choose to implement the required total reduction more quickly, and where this applies the provider is not required to reduce rent further (though must not increase it)

supported housing is excepted from Schedule 2 to allow providers to continue to set rents for social rent supported housing at 10% above the social rent rate; see ‘rent setting for supported housing section’ below

One year exceptions

These types of accommodation are excepted from the rent reduction requirements during the provider’s first relevant year, but alternative provision applies restricting any rent increases to CPI + 1% (0.9%).

all supported housing (that is not specialised supported housing) provided by local authorities and private registered providers – these include though are not necessarily limited to:

sheltered accommodation for older people

extra care housing

domestic violence refuges and other specialist accommodation based support for domestic violence victims

hostels and other supported accommodation for the homeless

supported accommodation for people with drug or alcohol problems

supported accommodation for people with mental health issues

supported accommodation for ex-offenders and people at risk of offending

supported accommodation for people with disabilities

supported accommodation for people with learning disabilities

supported accommodation for young people

supported accommodation for teenage parents

almshouses

community land trusts

fully mutual and co-operative housing associations

Rents for almshouses, community land trust and fully mutual and co-operative housing associations – modifications of section 23 and Part 1 of Schedule 2

During the first relevant year, providers can continue to set rents as under the previous rent policy. The limit on annual rent increases in the first relevant year will be CPI+1% (CPI was -0.1% as at September 2015, so the limit would be 0.9%). Section 23 and Part 1 of Schedule 2 are modified to reflect this. Providers can continue to use the 5% rent flexibility during the first relevant year.

Rents for supported housing – modifications of section 23 and Part 1 of Schedule 2

During the first year, providers can continue to set rents as under the previous rent policy. The limit on annual rent increase during 2016 to 2017 will be CPI+1% (CPI was -0.1% as at September 2015, so the limit would be 0.9%).

Section 23 and Part 1 of Schedule 2 are modified to reflect this (the modifications to section 23 are only applicable in the first relevant year, those in respect of Schedule 2 will apply for the 4 relevant years).

Modifications of Schedule 2 also provide that the starting point for calculating the social rent rate is 10% above 2015 to 2016 formula rent .

Rents for supported housing from the second relevant year

The government is in the process of reviewing supported housing and initial findings are expected to be available in Spring. We will use these findings to consider workable and sustainable solutions for the sector.

Exemptions from rent reduction

A private registered provider may be granted an exemption from the requirements of the Act if the regulator considers that complying with the rent reduction requirements would jeopardise the provider’s financial viability or where exempted stock owned by providers in financial difficulties is sold or transferred to another private registered provider.

A local authority may be granted an exemption if the Secretary of State considers the authority would be unable to avoid serious financial difficulties if it were to comply with the requirements.

For private registered providers, they should apply to the Regulator of Social Housing. See the guidance on applying for an exemption.

Transitional provision

The Bill also gives providers flexibility in how they transition from the rent reduction by allowing them to review rents soon after the 4-year period ends, before the date specified in individual tenancy agreements. Providers thereafter have the option of re-aligning their rent review cycle with the first post-rent reduction rent review, or reverting to the original review cycle.